Halloween

Asia markets managed to close out the month of October and post their second consecutive day of gains in what has been a pretty poor month for equity markets in general.

This rebound could well be down to some end of month position adjusting, however there have been some indications in the past few days that we might be starting to see a bit of a short term base, with most of the bad news already priced in to some extent.

This may be why markets shrugged off the latest Chinese manufacturing and services PMI data for October which pretty much confirmed that the Chinese economy was slowing down with manufacturing posting its lowest level of activity in over two years at 50.2, with new export orders contracting for the fifth month in a row. 

The gains in Asia markets were no doubt helped by a decent US session which also saw their second consecutive positive session, though a negative reaction to Facebook’s results after the close may well temper those gains when US markets reopen later.

The Bank of Japan unsurprisingly left monetary policy unchanged, however in a sign that they probably won’t be in a rush to tighten policy any time soon they cut their inflation forecast for this year to 0.9%, as well as next year, to 1.4%, as the ever illusive 2% inflation target moves further away into the distance.

In Europe markets have taken their cues from the Asia session with a strongly positive open despite some more disappointing economic data, this time from the German economy where retail sales in September rose 0.1% on the month, below expectations of 0.5%, and on an annualised basis declined 2.6%.

The latest CPI numbers from France came in slightly softer than expected for October which means this morning’s latest preliminary EU CPI numbers are likely to go the same way given this week’s weaker than expected Italy and Germany numbers. This inevitably raises the question as to the wisdom of the ECB in signalling the prospect of a rate rise next year even if it is in Q4. Pushing hawkish guidance at a time when growth is stalling and inflation is going the same way is not what can be described as good policy. By all means pare back their asset purchase program, however their guidance needs to be much more dovish given the current slowdown being seen in the hard data.

On the earnings front UK retail is back in focus in the wake of yesterday’s bailout of Evan’s Cycles by Mike Ashley’s Sports Direct. The contraction and changes in UK retail has been an underlying strand of the markets story this year, and today’s Q3 trading update from Next continue to underline that challenge.

Since the summer peaks of 6,200p the shares declined to lows just below 5,000p as the business struggled with what it called earlier this year &ldquo the most challenging year we have faced in 25 years”

Having benefited early on from the move to on-line with its Next Directory offering, the arrival of Primark and on-line brands like ASOS has hit margins quite hard. The shares have rebounded from their October lows after a decent summer performance, however even today’s Q3 numbers have shown that more challenges lie ahead. Q3 sales showed a bigger than expected decline to 8%, though on-line sales did rise more than expected by 12.7%.

More importantly the company maintained its full year guidance of pre-tax profit of £727m, and EPS growth of 5%, though this optimism doesn’t appear to be shared by investors who have sent the shares back to the lows this month.

Asia focused UK bank Standard Chartered also continued its turnaround story with a jump in profits of 25% in its latest update to the markets, despite problems in its Middle East operations. Like its regional peer HSBC, its Asia operations, including China, showed a decent performance, which despite concerns about a slowdown in that region, don’t appear to have hurt its ability to boost revenues.

Airbus latest Q3 numbers will inevitably draw comparisons with Boeing’s recent bumper numbers, and on a headline basis they do look fairly impressive, however they do mask a number of problems.

Earnings came in at €1.58bn, above expectations of €1.4bn, as the company delivered 52 more jets than the previous year, with the A350 program outperforming, while engine problems slowed down the delivery of its A320neo program. Other potential problems could be the lack of a Brexit deal given that its wing factory is located in Broughton in Wales, with a hard Brexit potentially impacting the supply chain quite significantly.

The pound is amongst the better performers so far today despite yesterday’s ratings warning from S&P and disappointing Gfk consumer confidence numbers overnight. The S&P warning is merely stating the obvious and something which markets have been concerned about for some time, while the decline in consumer and business confidence is entirely understandable given the current political gridlock.

US markets look poised to continue where they left off yesterday by opening higher, despite some disappointment over Facebooks latest Q3 results after the close. While profits did beat expectations by some margin, coming in at $1.76c, well above the $1.47c consensus there were further signs of slowing user growth. Revenues were still 33% higher, however investors will need to start getting used to the fact that these types of gains aren’t likely to be sustained. This means the company will need to be more innovative in driving up revenue per user as user growth slows further.

Apple is also expected to be in focus after yesterday’s launch of a range of new Mac’s and iPad’s, with significantly higher price points, and ahead of tomorrow’s latest Q3 numbers. 

On the data front we have the latest ADP employment report for October which should give us an insight into the US labour market after a decent 230k number in September.  

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